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Rite Aid to Refinance Debt

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Shares of drugstore chain retailer, Rite Aid Corporation (RAD - Analyst Report) reached a new 52-week, touching $3.08 on Jun 7, 2013. This followed the company’s announcement of the initiation of a debt refinancing transaction and an impressive outlook for first-quarter fiscal 2014. Notably, the closing price of the shares was $3.03, up approximately 4.5% from the day-ago figure of $2.90.

In an effort to extend the maturity of some debts and lower interest expenses, Rite Aid has started a debt refinancing activity. The transaction involves a tender offer of $500 million second-lien term loan for 7.5% Senior Secured Notes worth $500 million.

At the end of fiscal 2013, Rite Aid had $665.0 million borrowing outstanding under its senior credit facility, and $115 million of outstanding letters of credit.

The lenders under second-lien loan transaction hold a second priority security interest on the collateral assets of the borrower. This means that in case of bankruptcy or liquidation, second-lien lenders will be paid only after the payment of first-lien lenders.

Rite Aid which competes with GNC Holdings Inc. (GNC - Snapshot Report), proposed to pay $999.50 and a consent payment of $30 for every $1000 principal amount. The tender is scheduled to expire on Jul 5, if not extended or terminated earlier.

Moreover, the company provided estimates for first-quarter fiscal 2014, which is above the Zacks Consensus Estimate. Rite Aid anticipates net income in the range of $75–$90 million or 8–9 cents per share. Hence, the current Zacks Consensus Estimate of 4 cents per share may undergo an upward revision. Moreover, Rite Aid is expecting adjusted EBITDA in the range of $335 million to $345 million.

For fiscal 2014, the company raised its low-end adjusted EBITDA guidance range to $1.090 billion from $1.075 billion, but it kept its high-end guidance of $1.175 billion unchanged. However, Rite Aid lowered its fiscal 2014 high-end adjusted earnings guidance. The company now expects adjusted net income in range of $49–$189 million or 4–19 cents per share, compared with 4–20 cents forecasted earlier. Currently, the Zacks Consensus Estimate stands at 14 cents per share, and is expected to revise upwards.

Rite Aid, which trails Walgreen Co. and CVS Caremark Corp. (CVS - Analyst Report) in terms of store count, has persistently witnessed a downward sales trend over several quarters due to the introduction of lower cost generic (non-brand) drugs. Such non-branded drugs are less expensive in the market but generate higher gross margins for the company.

This is evident from Rite Aid’s performance in fourth-quarter fiscal 2013, when generic medication primarily drove its margin expansion. Going forward, this Zacks Rank #2 (Buy) stock is likely to focus on expanding its portfolio of generic medication, given the growing demand for such drugs.

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